Friday, June 9, 2017

The Aimia/Aeroplan saga trundles along as it will for some
time to come, with a regular diet of smiles and positivity coming to us all
from Aimia. This, of course, is to be expected, but there are certain elements
of the future that are far from defined, and far from comforting for those of
us with a substantial investment in this particular scrip.

Currently, Aimia are promoting a piece written by the
respected and well-informed Jeffrey Kwok from his blog www.loyaltymatter.net. This is an
interesting and well-informed blog, and he is well versed in the vagaries of
the world of points, but I would like to take him up on a couple of elements in
his piece.

“Nothing is changing
this very moment”, is the fist claim, and while he is correct in fact, in
practice this claim is a touch disingenuous. With no clear and beneficial
future, those of us sitting with millions of points, and there are many folks
who have such numbers, are deciding to stop collecting and start using.

Many of these collectors have operated small businesses via
a credit card for years, amassing huge numbers of points. These points, allowing
for the inevitable inflation, have been earmarked for people’s retirement
travel. I know at least four whose collection is over 10 million, and many
others with several million Aeroplan points to their name. Now, they feel that
they have two years to burn them, and the allocated award space is going faster
than usual. One can expect an acceleration as we near the end of the Star
Alliance alliance, and this feeling of urgency is a new phenomenon.

“You can still redeem
like you did before” is true, but with diminishing returns. Certainly there
are “exciting merchandise opportunities”,
but unless you have been collecting points in order to get a new barbeque, this
is not a really comforting option.

“I would not be
surprised if Aeroplan finds some other international alliance partner for which
to redeem miles”. This is the crux of the whole problem; while I am sure
that Aimia will find some outlets, the question is simply at what rate of
exchange.

Remember always, that loyalty points are a massive currency
with no central bank to back their value.

They, Aimia, are not an airline. As such they have no
ability to trade seats with other carriers or groups of carriers as the
airlines do. They will become a completely revenue-based loyalty program, and
thus will have to buy seats, as the Avion, Air Miles and other non-airline
programs do. This will in turn limit the price that they can pay, and any
chance of Business or First Class rewards will disappear. And for this
collecting Aeroplan in bulk, this opportunity, the aspirational seats, is the
sweet spot.

Few collectors care about a low season ticket to Europe that
still carries a $700 “service fee”; no, the aim is value, and in this regard the
airline plans excel; they are able to trade Big Seats with each other, and not
have to assign a cash price.

There will be other options, but until the exchange rate is
confirmed, I do not believe that they will be of any significant interest.

“Will I still be
collecting Aeroplan Miles? Yes”,says
Jeffrey, and I wish him well. However, for those of us with a million miles or
more, many are deciding to switch to a carrier where the attractive Big Seat
options are available.

And here lies the rub.

As with every business, the 80/20 rule applies. 80% of Aimia’s
revenue is generated by 20% of their clients. As revenue is generated by the sale
of points to credit card (and other) companies, if the big-hitters stop
collecting and change tack, this will hit Aimia’s cash flow very hard indeed.
And at that point, collectors will have to start worrying about the longevity
of a business who has already lost 65% of its market value.

I feel sorry for Aimia, although they knew that this was
coming, or should have done, but there is no apparent Plan B, and serious
collectors are now starting to burn their points in earnest whole there is
still the opportunity to do so.

Friday, May 12, 2017

Aeroplan’s slow demise started
months ago, and Air Canada’s announcement yesterday that they were going to
intervene in their headline program was simply an inevitable conclusion to a
slow motion drama. That Air Canada did not own their primary trade-brand has come of a bit of a shock to a lot of people.

First, some background. American
Airlines, back in 1981, had a brilliant idea; reward your best customers with
free flights. Their program, American AAdvantage continues to this day, but the
simplicity of the original concept has been lost in an ever-growing, and
completely unregulated, jungle of scrip. Air Canada’s program started in 1984,
and has been a powerful marketing tool ever since.

The real benefit of airline points

However, “points” are
simply a currency; their value lies in people’s belief that by accumulating
them, a benefit will arise. There is no central bank, the closest is an
organisation called points.com that for a massive fee will exchange one kind of
point for another, and there are no exchange rates. Issuers simply print more
and more, and the inevitable inflationary pressure this creates causes the
redemption rates to rise rapidly. As more people have accumulated these points
by the millions, the liability that airlines carry for their redemption has got
completely out of hand, and something needs to be done.

That the system is out of
control is indisputable; how a managed deflation will occur without annoying
millions of customers is a tricky path to determine. Air Canada have struck the
first blow, and are, if fact, to be commended.

The devil, however and as
always, is in the detail.

There are two types of
points in circulation. The first are those offered by airlines and hotels, and
are backed by the promise of access to their (and their partners’) products.
One gets sufficient airline/hotel points and one can claim a seat/room. To
expand their attractiveness, they join alliances, and thus Aeroplan points were
usable on the seats of all of their Star Alliance partners.

The second type of points
are the loyalty points that are offered by Air Miles, the TD Bank "Infinity" and RBC “Avion” programs. These represent money, and are simply individual
accounts that a portion of the money gained through merchant fees is assigned
for future use by the cardholder. Thus when one has reached a certain spend threshold,
say 60,000 points with RBC, one can get a ticket to Europe, but with the caveat
that there is a maximum value of $1,300 that is applied to the fare only, and
not the taxes/surcharges. In this case, one can see that the value per point is
2.1% - spend $60,000 and get a (maximum) $1,300 value. Other programs are less
valuable, some only offering a value of 0.5%.

If you wonder why the
value is applied only to the ticket bear in mind that the actual “fare” can
now comprise less than 50% of the total cost, and the “fare” often carries a
substantial commission from the airline that again lowers the actual cost to
the bank.

The difference is
significant. Aeroplan is not owned by an airline, it was sold to a private
company Aimia to raise money in 2002-5, and now, while the carrier has a
management relationship with Aimia, they are not the operator. This is a very
significant difference, and one of the factors behind the change, I believe.

While partner airlines can
trade seats between each other, Aimia can not do so; and recently, Air China,
COPA, Avianca and now Swiss have been blocking their seats from Aeroplan
redemption. Will more carriers follow suit, thus further devaluing Aeroplan’s
attractiveness? The points’ utility is decreasing, Aeroplan staff have been
told to say that “it is an IT problem”, which it is not, and the service is
faltering. The currency is devaluing and Air Canada are faced with the problem
of how to rescue their loyalty program. Their decision was powerful, and a
strong enough signal to cause Aimia’s stick price to drop by over 60% on the
day.

The future:

We know little. We have
been told that after June 2020, Aeroplan will no longer be the Air Canada (and
thus local Star Alliance) program and any accrued points will be the
responsibility of Aimia. There will be a new program, but one cannot accrue
points in it now, and Aeroplan points will not be transferred into it;
difficult if one is saving for a Star Alliance redemption beyond June 2020.

For those many, many
people who already have sufficient Aeroplan points to last them for a couple of
years, given today’s information, I would suggest the following. Enroll in another
Star Alliance program, Aegean Airlines if one wants to travel to the
Mediterranean, United Airlines' program for those looking to visit the US, Lufthansa/Swiss for
a more global reach and accrue the Air Canada miles on those programs. Switch
credit cards to one that offers miles in a known program (MBNA has an Alaska Airlines card that I use, the miles being good for a wide variety of carriers),
there is British Airways card available, and the American Express cards offer a
few redemption options. There is also, of course, a WestJet card, but this is really only good for travel on their network, and is again, revenue-based.

And wait and see. Having
successfully knocked $1 billion off the market price for Aimia by a slight flex
of muscle, perhaps Air Canada will simply buy Aeroplan back, recalibrate the program and
continue as usual – this would be a fine outcome for everyone. And perhaps they
will decide that they can comfortably rid themselves of the massive liability
of accrued points by letting Aimia die and move on to a brave new world.

One thing is for certain;
one can be pro-active or reactive, and given all of the signals that are
currently in the air, I will wait for a week or so and then make my move.

And, at the same time, use
up the points that have been stored away for a rainy day.

Saturday, November 9, 2013

Frequent flyer points are the crack-cocaine of the travel
world; folks do all sorts of peculiar things to maintain status and benefits
from their favoured carriers, one friend of mine is flying to Argentina this
weekend simply to maintain his top-tier status for next year, but rarely are
these devotions reciprocated.

Airlines are getting bigger and bigger, and if one counts
Alliances as a carrier itself, they are simply global behemoths, and care
little for any individual; as a result, they create targets, measured either in
segments flown, or in the actual miles travelled, with attractive benefits for
those who reach these levels.

However, their currency, frequent flyer points, are like any
other currency; create too many and they will devalue. In the case or airline
points, of course, these points, and their concurrent liability to the airline,
grow as more people fly, miles are accumulated and not utilised and their “partners”,
hotels, credit card companies and the like, issue more and more; more even than
the “dollars” issued by the Zimbabwean Central Bank at its zenith.

So there is but one solution for the airlines, and that is
their yearly 10 - 15% devaluation; it is true that few of us would actually
hold any other investment that shed value so predictably, but we do. In the
case of Air Canada, at least some notice is given; others like Delta simply
announce that “today” the value of their points has decreased; no chance to
book a trip with points accumulated, just back to the airport for a few more
flights.

Points too have their blindside; it is rarely worth using
Aeroplan points, for example, for a low-season ticket to Europe in economy. A
recent look at purchasing a Winnipeg - Dublin / Paris - Winnipeg ticket is a
good example. Including taxes, the ticket would cost $1,150; to use Aeroplan
points, it would have cost 60,000 points, plus a rather irritating $730 in “taxes
and surcharges”; the saving would be a massive $420. Now putting this into
perspective, a ticket from Winnipeg to New York, Los Angeles or New Orleans can
often cost upwards of $700 these days, yet one can use 50,000 points and $87
(per person) in fees for a reward ticket; a much better value for utilising
accumulated Aeroplan points.

Aspirational travel is, of course, the best value of all;
travelling in business and first class is beyond the pockets of many of us, and
if one has sufficient points, the value can be spectacular. A First Class
return ticket, complete with large, flat beds, caviar, luxurious ground
facilities and all the fun of the fair, can be yours for a mere $13,000 per
ticket, or currently 125,000/145,000 points for a ticket to Europe. Space in
these classes can be harder to come by, but persistence or the assistance of a
suitable compensated travel professional can be invaluable.

It is also worth subscribing to one of the myriad of
frequent-flyer blogs; one I particularly like is “One Mile at a Time”, (www.boardingarea.com/onemileatatime);
it is a touch US-centric, but nevertheless interesting.

The best advice now, unfortunately for those who were collecting
for their dotage, is to “Earn them and burn them”; similarly, it is worth
accruing points in a neutral program such as Diners Club or American Express
who allow you to hold points, and then turn them into a variety of different
programs.

And be careful of exchange rates! As with any other currency
exchange, there are huge variations. It costs fare fewer Alaska Airlines or
American Airlines points to travel on British Airways that it does BA points
themselves, yet they accrue at the same exchange rate via the credit cards.
There are many other such opportunities, and a canny traveller will look at
three issues: where do I want to go, who travels there and which points can be
turned into this journey.

The answers to that question may surprise you; but on the
other hand, they may get you to your preferred destination faster and in more
comfort!

Monday, January 18, 2010

Airline points have become the crack cocaine of the travel world. Fly, buy dinner, fill up with gas and you get rewarded with scrip called rather optimistically "Frequent Flyer Miles". They come in a variety of guises, and like every other currency have extremely variable exchange rates.

Oddly, it seems that the most valuable part of many airlines today is the division that gives stuff away for nothing, and therein lies the rub.

"Points" are a currency; nothing less and nothing more. Airlines sell them to a variety of partners for (say) 4 cents each, and then sell seats back to flyers for these points. Profitable and a fine system.

Until the money supply gets out of hand, and inflation strikes. While the various schemes have yet to reach Zimbabwean levels, there are some distinctly nasty clouds on the horizon. Airlines often churn points out by the million; a recent financing deal between United and their primary bankers involved the exchange of hundreds of millions of United's Mileage Plus. These points are dangled in front the banks' clients as lures to some commercial activity, and hey presto, there are thousands more consumers dreaming of palm trees.

Think, however, of the problems caused by increasing the money supply (points) while simultaneously reducing the overall number of seats available on the airlines' systems - a 20 million drop in available seats throughout the North American system compared to last year.

How will the carriers respond? Gently, I think, but in the traditional way; prices will rise. Delta announced a major increase last year, by offering three levels of reward seats; by increasing the number of points that you use, they will open up more seats. Fair enough in a way, but a price increase by any other name.

My advice? Book early, and remember that there is only a small fee (currently $90 or so) to cancel and put your points back; book next summer's trip to Europe now, and think of the $90 as an option. Use them up as fast as you can, because their value will shrink away in front of your very eyes.

Unless you want a kettle, of course. Exchanging airline points for kitchen equipment or haberdashery seems odd to me, but there will be increasing pressure to do so.